A little more than 50 years ago, access to the investment returns of commercial real estate as a core asset was available only to institutions and wealthy individuals having the financial wherewithal to undertake direct real estate investment. Then, in 1960, the US Congress created real estate investment trusts (REITs) as a way to make investment in large-scale, income-producing real estate accessible to all investors.
It took some time – and a 1986 reform to a restriction keeping the ownership and management of the assets separate – but investors eventually responded to the opportunity and today listed US REITs constitute a more than $300 billion equity market. Outside the US, REITs and listed property companies constitute another $700 billion plus, comprising a listed REIT and real estate investment universe of more than $1 trillion. Still, from an asset allocation perspective, publicly-traded REITs and REIT exchange-traded funds are often highly correlated to equities, especially over a short-term investment horizon.
Now, however, a similar structural innovation promises to do for institutional real estate managers what REITs did for commercial property – give access to the masses. Versus Capital Advisors has launched a real estate fund of funds that will target $750 million in equity commitments from tens of thousands of retail investors, as opposed to a limited number of institutional LPs.
Speaking to PERE, Mark Quam, chief executive officer of Versus, said there are limited options for retail investors who want to target real estate. “You either buy an apartment building or invest in REITs and REIT-model funds. Individual investors have never had access to institutional real estate managers and, at the same time, these managers have never had access to retail capital.”
According to the firm’s SEC filing, the Versus fund of funds offers a distinct advantage to retail investors: the ability to circumvent the prohibitive minimum investments required by institutionally-managed real estate funds — and get much better liquidity. The minimum equity investment has been set at just $10,000, with the average commitment expected to be between $50,000 and $75,000, and the fund will offer to repurchase between 5 percent and 25 percent of outstanding shares four times per year, although people familiar with the matter said it likely would be closer to the 5 percent mark. That is in stark contrast to the $5 million to $10 million minimum investment and five- to seven-year capital commitment for shares in top institutional real estate funds.
Although the Versus fund primarily will invest in open-ended, core and core-plus real estate fund managers, it is being seen as a way of expanding the fundraising environment for other real estate fund of funds. People familiar with the matter said the Colorado-based firm would considering launching a vehicle targeting retail investors interested in investing in closed-ended, value-added and opportunistic GPs in the future, if demand for the higher risk profile is there.
Ultimately, however, the future of opening up institutional fund managers to the retail market lies with the success of the Versus fund of funds and the willingness of other multi-managers to follow suit. Both of those outcomes will be determined by investors demand.